Asset Management at Northern Trust 1

HURRICANES ARE BACK: MUNI MARKET RISKSCredit analysis cannot predict the timing and severity of hurricanes and other natural disasters, but it can consider the preparedness, credit strength and resiliency of issuers.

Severe storms can leave long-lasting damage in their wake. However, a strong credit profile, combined with the support of federal and state resources, can help facilitate repair and recovery.

Force majeure (i.e. hurricanes, tornadoes, earthquakes, and wildfires), while infrequent, can cause widespread damage, especially when densely populated urban centers are affected.

MOHAMMED MURAD Analyst

MIKE O’LEARY, CFA Analyst

STEPHANIE WOEPPEL Senior Analyst, Team Leader

14 – 22

23 – 32

33 – 52

53 – 120

121 – 280

Coastal County

RETURN PERIOD IN YEARS FOR HURRICANES OF CATEGORY 3 OR HIGHER (winds > 111mph)

Return period is the estimated time (in years) it takes a major hurricane to strike the same community again.

Source: National Oceanic and Atmospheric Administration

Return Period (Years)Major Hurricane (>=96kt)

Asset Management at Northern Trust 2

HURRICANES ARE BACK: MUNI MARKET RISKS

The following are key credit considerations when examining storm prone areas:

• Underlying credit health: Is rebuilding worthwhile? A thriving economic and demographic landscape combined with solid financials will support a more complete and rapid rebuild effort. A healthy muni issuer (obligor and any support/guarantor) is more likely to recover quickly than one with challenged credit, as it has more resources available.

• Area profile: When an area is devastated, municipal borrowers with a small footprint or concentrated economy are at an increased risk for payment interruption. Borrowers with broader footprints and/or proper insurance can help mitigate this risk.

• Disaster preparedness: In the U.S., approximately 60% of hurricanes make landfall in Texas and Florida. Florida has implemented zoning and building codes to help limit their impact. Private or public insurance programs can also help manage this risk.

• Revenue sensitivity: Certain revenue streams are more volatile in stressful situations. The nature of pledged revenue (i.e. property, sales, hospitality taxes, etc.) and coverage levels should be considered.

Strong rebuilding efforts can boost economies as well as enhance infrastructure improvements that better position the obligor for future storms. Large storms may weaken credit in the short-term, but, at times, issuers will emerge stronger.

THE ROLE OF THE FEDERAL GOVERNMENT

Once the Federal Emergency Management Agency (FEMA) declares a federal disaster it covers a minimum of 75% of emergency costs that go toward preparations, safety, and cleanup efforts. Historically, this has been upwards of 100% of immediate costs and 90% for ongoing costs. FEMA is currently active in recovery efforts for Hurricane Harvey, Hurricane Irma and the Montana fires.

FEMA continues to reimburse Louisiana for 100% of costs under the public assistance mitigation grant progams for the losses it incurred after Hurricane Katrina in 2005. Total federal obligated cost to the state was $12.4 billion as of August 2015. (www.fema.gov 2015)

HURRICANES RETURN TO THE US

The 2017 hurricane season is off to a destructive start. After a record 12-year absence of Category 3 or higher hurricanes to make U.S. landfall, Hurricane Harvey hit eastern Texas on August 25 and unleased close to 50 inches of rain. On September 10, Hurricane Irma swept through the Caribbean before making landfall in Florida.

Florida accounts for the majority of hurricanes that have made U.S. landfall. From 1851-2010, 114 hurricanes struck Florida or 40.1% of the total, with Category 2 and 3 hurricanes accounting for 52.8% of all that struck the U.S. Communities most at risk are along the southern coasts of the peninsula and include Miami-Dade/Broward/Palm Beach counties (Miami-Fort Lauderdale-Pompano Beach metro), which has a population of approximately 10 million and Hillsborough County (Tampa-St. Petersburg-Clearwater metro) on the west coast, which has another two million residents.

TOP FIVE COSTLIEST U.S. HURRICANES

Date Hurricane Cost

2005 KATRINA $160.0 BILLION

2012 SANDY $70.2 BILLION

1992 ANDREW $47.8 BILLION

2008 IKE $34.8 BILLION

2004 IVAN $27.1 BILLION

Source: National Oceanic and Atmospheric Administration

(Includes hurricanes through 2016. CPI-adjusted)

Asset Management at Northern Trust 3

HURRICANES ARE BACK: MUNI MARKET RISKS

Resiliency in Florida

In the aftermath of Hurricane Andrew, the last Category 5 storm to hit the U.S. 25 years ago, south Florida implemented a building code to ensure buildings withstood high winds. Laws required businesses to own generators, so they could reopen quickly. Residents outfitted their homes proactively.

Florida is now seen as a leader when it comes to storm preparation. Counties invested in rescue preparation and trained teams of emergency workers to deal with severe storms. Miami-Dade’s swift response teams are part of a specially designated federal network.

Hurricane Andrew’s Impact (August 1992)

Hurricane Andrew had a temporary negative effect on Miami’s tax collections, home values and tourism sector. In August, Miami-Dade County’s tax collections dropped 39.5%, but recovered the following month. Similarly, Miami home prices dipped in August and September but rose in October. The local job market was resilient: unemployment was stable in August and September but dropped at a faster pace than the state and national average because of rebuilding. Florida is significantly dependent on tourism for employment (12.6% of total). Jobs in the sector dropped in August and September, but recovered by March 1993.

HURRICANE HARVEY

Hurricane Harvey was the first Category 4 storm to hit Texas in more than 40 years. Massive destruction, largely associated with flooding from an unprecedented 50 inches of rain, is estimated to cost between $150 and $180 billion across 54 counties. (Both Florida and Houston are susceptible to excessive rainfall as they sit at or below sea level. However, zoning rules are more stringent in Florida than they are in Houston.)

Congress has already approved $15.2 billion in additional funding. This includes FEMA’s Disaster Relief Fund, the Small Business Administration’s Disaster Loan Program and Community Development Block Grant funding (flexible grants to help recovery, especially in low-income areas). Congress is scheduled to vote on an additional $6.7 billion aid package at the end of September. Once the damage is fully assessed, the total request for federal aid is expected to top $100 billion.

Texas’ AAA rating from all three agencies reveals it is on relatively solid financial standing and has the nation’s largest economic stabilization fund, with $9.7 billion at its disposal. This fund pays for cleanup and reconstruction as well as covers some costs federal government and private insurers may not reimburse.

7072747678808284

Jan-

92

Mar

-92

May

-92

Jul-9

2

Sep

-92

Nov

-92

Jan-

93

Mar

-93

May

-93

Jul-9

3

Sep

-93

Nov

-93

S&P Case – Shiller Home Price Index (Jan 2000=100)

Miami-Dade County Tax Collections

U.S. Home Price Index

Miami Home Price Index

Source: St. Louis Fed

6.0

7.0

8.0

9.0

10.0

Jan-

92

Mar

-92

May

-92

Jul-9

2

Sep

-92

Nov

-92

Jan-

93

Mar

-93

May

-93

Jul-9

3

Sep

-93

Nov

-93

(%)

Unemployment Rate

Miami Dade County Florida U.S.

Source: St. Louis Fed

-100-50

050

100150200

Jul-9

1Se

p-9

1N

ov-9

1Ja

n-92

Mar

-92

May

-92

Jul-9

2Se

p-9

2N

ov-9

2Ja

n-93

Mar

-93

May

-93

Jul-9

3Se

p-9

3N

ov-9

3Ja

n-94

Mar

-94

May

-94

Jul-9

4Se

p-9

4

(% change)

Source: Miami-Dade County

9.510.010.511.011.512.0

Jan-

93

Dec

-92

Nov

-92

Oct

-92

Sep

-92

Aug-

92

Jul-9

2

Jun-

92

May

-92

Apr-

92

Mar

-92

Feb

-92

Jan-

92

(% of total)

City of Miami Tourism Employment

Source: Merritt Research Data

IMPACT OF CATEGORY 5 HURRICANE ANDREW ON MIAMI (AUGUST 1992)

Asset Management at Northern Trust 4

HURRICANES ARE BACK: MUNI MARKET RISKS

northerntrust.com Q60580 (9/17)

HARVEY VS. KATRINA

While Harvey will rival Katrina in reconstruction costs, the rebuilding of New Orleans and Houston will differ. Houston’s larger population base, bigger geographic footprint, higher credit rating, more diversified economy and its role as an anchor of the energy sector will position the city for a quicker and stronger recovery.

CONCLUSION

• Weather events have historically had limited long-term impact on the credit profile of municipal issuers.

• We expect an initial uptick in jobless claims and a decline in hours worked in affected areas.

• Municipalities will likely face short-term liquidity and financial pressures as they address elevated upfront costs for cleanup and rebuilding.

• Longer term there will likely be an economic boost - municipalities often come out stronger as rebuilding and recovery efforts often stimulate local economies.

• Federal and state aid, along with private insurance payments, flow into the region, helping offset upfront costs and providing financial relief.

7072747678808284

Jan-

92

Mar

-92

May

-92

Jul-9

2

Sep

-92

Nov

-92

Jan-

93

Mar

-93

May

-93

Jul-9

3

Sep

-93

Nov

-93

S&P CASE – SHILLER HOME PRICE INDEX MIAMI-DADE COUNTY TAX COLLECTIONS (Jan 2000=100)

U.S. Home Price Index Miami Home Price Index

source: St. Louis Fed

6.0

7.0

8.0

9.0

10.0

Jan-

92

Mar

-92

May

-92

Jul-9

2

Sep

-92

Nov

-92

Jan-

93

Mar

-93

May

-93

Jul-9

3

Sep

-93

Nov

-93

(%) UNEMPLOYMENT RATE

Miami Dade County Florida U.S.

source: St. Louis Fed

-100-50

050

100150200

Jul-9

1Se

p-9

1N

ov-9

1Ja

n-92

Mar

-92

May

-92

Jul-9

2Se

p-9

2N

ov-9

2Ja

n-93

Mar

-93

May

-93

Jul-9

3Se

p-9

3N

ov-9

3Ja

n-94

Mar

-94

May

-94

Jul-9

4Se

p-9

4

(% change)

source: Miami-Dade County

9.510.010.511.011.512.0

Jan-

93

Dec

-92

Nov

-92

Oct

-92

Sep

-92

Aug

-92

Jul-9

2

Jun-

92

May

-92

Ap

r-92

Mar

-92

Feb

-92

Jan-

92

(% of total) CITY OF MIAMI TOURISM EMPLOYMENT

source: Merritt Research Data

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

*

2018

*

Houston Tax Revenue Stress Possible in 2018

$0

$200

$400

$600

$800

$1,000

$1,200

General fund reserves Property tax Sales tax

Sources: Houston CAFRs, Houston budget, Northern Trust

in millions

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

New Orleans Tax Revenue Change (Katrina 2005)

-25%-20%-15%-10%

-5%0%5%

10%15%20%25%

Property tax % change Sales tax % change

Source: New Orleans CAFR

IMPORTANT INFORMATION. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc. Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K, NT Global Advisors Inc., 50 South Capital Advisors, LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

© 2017 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

HOUSTON

• Estimated total cost: $150 to $180 billion

• Estimated 26% of homes damaged

• 2.3 million population with nominal declines expected

• Credit ratings prior to storm: Aa3/AA

• We anticipate total tax revenues to decline up to 10%. Recovery, barring another event, will likely be relatively rapid.

• No bonds are expected to default as a result of storm

NEW ORLEANS

• Costs: $160 billion

• 70% of homes damaged

• 0.5 million population, fell by 54% after storm

• Credit ratings prior to storm: Baa1/BBB+

• Sales tax revenue fell 24%, property tax revenue fell 20%. Revenues did not recover to pre-storm levels until 2013 and 2010, respectively

• No bonds defaulted as result of storm